Saturday, August 12, 2017

Regardless of how it is measured volatility reflects the difference between the world as we imagine it to be and the world that actually exists.

Volatility
is your only escape from the
Prisoner’s Dilemma

Hedge
unknown unknowns
and sell
known unknowns

Global Macro Straddle + Asset Beta

Those are a couple of the headers from the conference slide show, pretty wild stuff, interesting graphics too.45 page PDF

And the verbiage from Artemis Capital Management hosted on Squarespace:

Volatility and the Allegory of the Prisoner’s Dilemma

False Peace,
Moral Hazard,
and
Shadow Convexity

Dorothy Thompson once said
“peace is not the
absence of conflict.
Never forget
here is a form of peace and stability
reinforced by a foundation of underlying volatility. Game theorists call this the paradox of the
Prisoner’s Dilemma,
and it
describes a dangerously fragile equilibrium achieved only
through brutal competition. The
Prisoner’s Dilemma
is the most
important paradigm for understanding shadow risk in modern financial markets
at
the pinnacle of a multigenerational
debt cycle unparalleled in the history of finance.

In their masterwork tapestry entitled “Allegory of the Prisoner’s Dilemma” the artists Diaz Hope and Roth visually depict
a great tower of civilization that rests upon a bedrock of human cooperation and competition across history. The artists
force us to confront the fact that after 10,000 years of human civilization we are now at a crossroads. Today we have the
highest living standards
in human history that co-exist
with an ability to destroy our planet ecologically and ourselves
through nuclear war. We are in the greatest period of stability with the largest probabilistic tail risk ever. The majority of
Americans have lived their entire lives without ever experiencing a direct war and this is, by all accounts, rare in the history
of humankind. Does this mean we are safe from the
risk of devastating conflict
on our own soil
? In 1961, at
the
height of
the Cold War, a B-52 bomber carrying two Mark 39 thermonuclear bombs accidentally crashed in rural North Carolina. A
low technology voltage switch was the only thing that prevented a
4-megaton nuclear bomb with 250 times the yield of
the bomb dropped on
Hiroshima from detonating on American soil. In addition
to
killing everyone within the vicinity of
the blast,
the winds would have carried radioactive fallout over Washington D.C., Baltimore, Philadelphia, and New York
City
(1)
. It is not inconceivable to imagine that, at the height of cold war, a weapon of that magnitude exploding randomly
on the eastern seaboard would have triggered immediate accidental retaliation against the Soviets
resulting in full scale
Armageddon and the end of humankind as we know it. This is just one of many nuclear accidents
during
the cold war
.
Peace has a dark side. Peace can exist due to hidden conflict in the Prisoner’s Dilemma.

Global Capitalism is trapped in its own Prisoner’s Dilemma;
forty-four
years after the end of the Bretton Woods
System
global central banks have manipulated the cost of risk in a competition of devaluation leading to a dangerous build up in
debt and leverage, lower risk premiums,
income disparity, and greater
probability of
tail events on both sides of the return
distribution. Truth is being suppressed by the tools of money. Market behavior has now fully adapted to the expectation
of preemptive central bank action to crisis creating a dangerous self-reflexivity and moral hazard. Volatility markets are
warped in this new reality routinely exhibiting schizophrenic behavior. The tremendous growth of the short volatility
complex across all assets, combined with self
-
reflexive
investment strategies, are creating a dangerous ‘shadow convexity’
that will fuel the next hyper
-
crash. Central banks in the US, Europe, Japan, and China now own substantial portions of
their own bond or equity markets. We are nearing the end of a
thirty year
“monetary super
-
cycle” that created a “debt
super-cycle”, a giant tower of babel in the capitalist system. As markets now fully price the expectation of central bank
control we are now only one voltage switch away from the razors edge of risk.
Do not fool yourself
-
peace is not the
absence of conflict
–
peace can exist on the very edge of volatility.

Prisoner’s Dilemma
describes when two purely rational entities may not cooperate even if it is in their best interests to
do so, thereby replacing known risks for unknown risks. In an arms race when two superpowers possess the ability to
destroy each other,
the optimal solution is disarmament and peace. If the superpowers do not trust one another
completely, the natural course of action is proliferation of conflict through nuclear armament despite great peril to all.
This non
-
cooperation, selfishness, and conflict, ironically results in an equilibrium of peace, but with massive risk....

VOLATILITY AND THE ALLEGORY OF THE
PRISONER’S
DILEMMA
MORAL
HAZARD IN THE
PRISONER’S DILEMMA
COSMOLOGY IN THE
PRISONER’S
DILEMMA
RISK
CONTROL IN THE
PRISONER’S
DILEMMA
CONVEXITY AND THE
PRISONER’S
DILEMMA
SHADOW
SHORT
CONVEXITY IN THE
PRISONER’S
DILEMMA
BLACK
SWANS IN THE
PRISONER’S
DILEMMA
MODERN
PORTFOLIO
THEORY IN THE
PRISONER’S
DILEMMA
CONVEXITY
EXPOSURE IN THE
PRISONER’S
DILEMMA
EQUITY
VALUATIONS IN THE
PRISONER’S
DILEMMA
YIELDS IN THE
PRISONER’S
DILEMMA
STOCK AND
BOND
CORRELATIONS IN THE
PRISONER’S
DILEMMA
VIX
IN THE
PRISONER’S
DILEMMA
SHORT
VOLATILITY IN THE
PRISONER’S
DILEMMA
DEBT IN THE
PRISONER’S
DILEMMA
INCOME
INEQUALITY IN THE
PRISONER’S
DILEMMA
DEMOCRACY IN THE
PRISONER’S
DILEMMA
ESCAPE FROM THE
PRISONER’S
DILEMMA
EPILOGUE TO THE
PRISONER’S
DILEMMA
APPENDIX
CINEMATIC
CONVEXITY
ALLEGORY OF THE
PRISONER’S
DILEMMA
TAPESTRY
KEY AND
ARTIST
COMMENTARY

FT Alphaville's Izabella Kaminska used to talk with Chris Cole of
Artemis Capital about volatility but I haven't seen him mentioned in a
while. What he's up to is on a whole different level from the usual.
Here's an example: The shadow convexity risk in the machine (and the VIX)